Don’t Despair About the Dow Jones’ Descent

After four consecutive down days for the Dow Jones Transportation Average and three consecutive down days for the Dow Jones Industrial Average, are things about to fall off a cliff?

While the bears continue to point to negative divergences across market internals (NYSE 52-week highs peaked in May) and momentum (oscillators are not confirming the recent new highs in price), the bulls simply point to price action. After all, it is difficult to argue against price action, considering it is the only thing that pays the bills (assuming one is on the right side of the trend).

To put the recent mini-slide for stocks in percentage terms, the Dow Jones Industrial Average is just about 1.2% off its highs, while the transports — as represented by the iShares Transportation Average ETF (IYT[1]) — is closer to 3% lower. Relative to how far stocks have climbed over the past nine months, a 1.2%-3% slide is hardly enough to start preparing the parachutes quite yet.

Given the underperformance of the transports relative to the industrials over the past few days, should Dow theorists take this as a signal of great importance?

See the chart below (industrials in blue, transports in red). I will again point to the duration of the rally (close to nine months) and ask whether a three day under-performance of the industrials is anything to hang a hat on.

So, what would get me to raise a more significant red flag for more near-term weakness in the Dow Jones Transportation Index?

My definition of a trend change begins with lower lows for tops and higher highs for bottoms. Looking at the below chart, a near-term trend change would occur on a daily close below lateral support at 15400, which acted as resistance in May.

Until such time that the bears can break simple lateral support levels, the bulls have the ball in their hands. Much like in sports, however, the game can change quickly, so now is a good time to remind readers to never get complacent.

Serge Berger is the head trader and investment strategist for The Steady Trader[2]. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for his free weekly newsletter here[3].